Yahoo! Wins New Fans on Wall Street

Banc of America starts coverage with a buy and a $39 price target.

Yahoo! ( YHOO) may have lost some of Wall Street's confidence last week, but on Tuesday it gained new sell-side support.

Banc of America Securities analyst John Janedis started coverage on the Internet bellwether, assigning Yahoo! a buy rating as well as a price target toward the high end of brokerage forecasts for the company.

Janedis' $39 price target comes only a few days after Yahoo!'s good-but-not-good-enough second-quarter results speeded a downward slide. Yahoo!'s shares, which hit a 52-week-high of $36.51 on June 30, were trading at $30.36 Tuesday morning -- up 10 cents for the day but down 17% from their recent peak.

As Yahoo!'s shares have climbed over the past year -- they're still more than double the price where they were last summer -- analysts have wrestled with the question of whether the share price is justified by the company's revenue growth and cash flows, or whether Yahoo!'s stock is more reflective of yet another Internet stock bubble.

Like other Yahoo! bulls, Janedis praises the company's ability to generate free cash flow -- that is, cash flow from operations after interest expense and capital expenditures have been subtracted out -- and its ability to take advantage of the macroeconomic shift of marketing dollars to the Internet from other media.

Looking out over 10 years, Janedis calculates that Yahoo!'s current 15% share of global online advertising revenue will grow to 18%, and that online advertising's 2% share of the global ad market will increase to 10%.

"We think the long-term upside to the business model" isn't fully reflected in the stock price, writes Janedis. Distinguishing the current state of affairs from the turn-of-the-century bubble, he writes, "unlike the Internet heyday, Yahoo! has been able to have a demonstrable impact for advertisers and has found ways to effectively monetize its traffic."

Among other points in his report, Janedis says that the measurable return on investment of online search advertising will likely steal advertising dollars away from broadcast TV. There's great opportunity online for local advertising, he says, and though user growth could start to slow, Yahoo!'s specialized areas -- for example, sports and finance -- will pave the way for increased monetization of its user base.

The threat posed by Google, says Janedis, is overblown, and Google's "technologically superior" search engine will be commoditized by other entrants into the search market. Investors have certainly cast a hopeful eye on the second-tier search companies over the last year, sending the likes of Mamma.com ( MAMA), AskJeeves ( ASKJ) and FindWhat ( FWHT) higher in spite of tightening competition.

Janedis -- whose firm hasn't done recent banking for Yahoo! -- estimates that Yahoo! will report 33 cents in earnings for share for the year, in line with the Thomson First Call consensus, and 49 cents in 2005, two cents higher than the consensus.

The $39 price target is higher than the First Call median target of $35, but falls short of targets such as Credit Suisse First Boston's $45.